IT Companies Likely To Switch From Share Buybacks To Dividends

Cash-rich technology companies in India have been taking the buyback route for a couple of years now. However, this may change after the Union Budget 2019 proposed the a new tax on stock buyback.

According to Bloomberg data, over 70 companies, including Wipro had announced or completed share buybacks worth Rs 354.6 billion ($5.2 billion) in the first half of 2019. In 2018, these were worth Rs 546 billion, the most in six years.

The surge in stock prices that improved the earnings per share (EPS) made companies choose the buyback path, which was not taxed, while there is a 15 percent tax on dividend payment. To discourage the misuse of the path, the government has proposed a 20 percent tax on the money spent on share buybacks.

This is also going to impact the buybacks that are in progress.

As the tax savings on the buyback mode will be significantly lower, tech companies are likely to reward its shareholders by paying dividends instead.

Infosys has a stated strategy of returning 70 percent of free cash flow to shareholders. TCS (Tata Consultancy Services) also returns most of the cash to its shareholders. Among the IT companies, Wipro has been the most aggressive in using the buyback route. It repurchased 14 percent shares with three buybacks over the past four years. The trend is most likely going to change.